STAR BUCKS CASE STUDY

. Introduction

This case study is about critical analysis of issues related to corporate governance faced by the management of Starbucks. The case study includes analysis of four key issues that were being faced by Starbucks while directing and controlling its operations. In current case study, the issues that have been studied are stifling competition, avoidance of taxes and use of toilet water in cafe. These were issues that management of Starbucks had to face and due to these issues the performance and image of Starbucks was negatively affected (Nini et al, 2012). Starbucks is registered on stock markets of public, and workers, partners have been motivated always to purchase stocks in the organisation. CSR yearly reports of Starbucks have been evaluated independently since 2002 by external auditors. This has always exerted to communities and its immediate collaborators, but now it also enlarges to its supply chain. The brand is also a partner of UN Global Compact and its service tradition is dependent upon TBL thinking.

1.2. Context

The biggest house of coffee worldwide is Starbucks, with around forty million consumers in a week. The brand makes promises of customer satisfaction as an outcome of their high quality of products on consistent basis and relaxing environment for customers in the shop to enjoy high quality service experience. This experience comprise of three things: coffee of Starbucks, people of Starbucks, and the atmosphere of coffee shops of Starbucks. The experience of the brand aims to provide and enriching and inviting atmosphere in which consumers can enjoy a relaxing experience and can respite from work and home pressure (Nini et al, 2012). Starbucks is registered on stock markets of public, and workers, partners have been motivated always to purchase stocks in the organisation. CSR yearly reports of Starbucks have been evaluated independently since 2002 by external auditors.

The memorandum of inside from Starbuck’s chairman Horward Schultz was disclosed on the internet on February 2007. The memorandum given by the chairman was an image of passion the brand has to sustain in order to keep the originality of the brand’s experience while it prolongs to develop without neglecting its major values. The economic model before the year 2007 was constructed on hyper progression by building new outlets in a never stopping line (Hermalin and Weisbach, 2012).

The transformation Agenda (TTA) was announced by Schultz for the bran in March 2008, which consists of 7 big steps. TTA has been seen as a new license for the brand to work. This was the mind-set which dictated the initial focus of the brand until they get themselves in a better position, ready to reemphasise on profitable development.

Following were the 7 big moves:

·         Be the definite coffee authority

·         Inspire and interact with Starbucks partners

·         Trigger the emotional link with our consumers

·         Enlarge international presence – while forming every store the nucleus of the local district

·         Be a chief in environmental effect and ethical sourcing

·         Deliver a maintainable economic model

The mission and vision of the brand was amended as a section of the transformation agenda given by Starbucks. The mission of Starbucks: To nurture and persuade the spirit of human one district, one cup and one person at one time. The mission statement for the brand is quite wider guide and includes: district of brand, stores of brand, consumers of brand, shareholders of brand, partners of brand. The brand wishes for with its latest mission statement to move back to its origin and discover the stability for revenue with social moral sense and get rid of begin to make decisions which depend upon stock price or P/E. It is said by Schultz that they have built this remarkable brand around values-based companies and coffee. The approach for reorganised Starbucks brand is disciplined development regarding the way to run the brand stores and the way to improve customer experience (Bushee et al, 2013).  

Starbucks has continuously been striving to be the definite coffee authority, which value system relied on the performance by running with new mixtures; new mechanism before preparing to make better taste, coffee fresher and provides creamy aroma. By placing new machines of espresso provides better regulation of preparing coffee and more eye-contact with consumers (Acharya et al, 2013).

2. Description of Events

2.1. Stifling Competition

In 2006, Starbucks faced a lawsuit due to the use of anti-competitive strategies for getting rid of their competitors. Starbucks distributed free samples to its customers outside other small coffee shops that helped the company in gaining higher profits.  Moreover, Starbucks also signed leases for more than 1 time with property owners, so that people could not open small coffee shops over there. For example, in Boston, MA Starbucks did a contract with shop owner for getting shop at rent for 25 years. It was done by Starbucks so that near the shop of Starbucks there can be no other coffee shop. Due to these reasons, small companies filed a lawsuit against Starbucks (Fellner, 2008).

2.2.High use of sugar

In February 2016, Starbucks was accused of using excess amount of sugar in its products. It has been found from survey that in hot drinks of Starbucks, almost 20 teaspoons of sugar are added. Due to the high usage of sugar by Starbucks in its products, customers of Starbucks raised issue of getting obesity and other related health problems. This has resulted in creation of negative image of Starbucks in minds of customers. Starbucks had to face pressure from health experts and policy makers to change its quantity of sugar in products (Reid, 2016).

2.3. Avoidance of Taxes

The coffee menu of Starbucks frustrates some customers. In United Kingdom, the accounts of Starbucks which are making their customers confused. The company keeps on telling its investors that business of company is profitable, even as the company reported losses on consistent basis (Dowling, 2014). This clear contradiction emerges from avoidance of tax, and stresses on ideally legal schemes involved by multinationals internationally. Starbucks stand out in many because of the reason that it has told taxman something and the investor another (Campbell and Helleloid, 2016).From the four-month investigation done by Reuters that is a news agency, it has been found that Starbucks did not pay taxes for last three years. The finance managers of Starbucks reported losses in its financial statements, so that it can get rid of paying high taxes. Moreover, it has been revealed that £398m sales were generated by Starbucks in 2011, but no tax was paid by Starbucks (BBC News, 2016).

2.4. Use of toilet water in Coffee

The coffee shop present in the bank of China Tower has been the water through tap in lavatory in order to make beverages since it opened up in October 2011. Images through Apple Daily local newspaper depicted that tap having the sign that Starbuck is present only a few feet away from urinal; which according to the research was in the parking area of building. The starting decision of Starbucks to utilise water through toilet is the major sign of vision of organisation. This shows the disrespect level of organisation relative to mind and health of consumers. Now most of the people are not willing to purchase anything from Starbucks.  The collection of water was done less than five times in a day through staff from tap in lavatory which is present near the shop; Starbucks stated to AFP that its objective is to collect drinking water (Gates, 2014).

 

PART II. Case Study Analysis

3. Theory with every issue

3.1. Stifling Competition

In accordance with Utilitarian, Virtue and Kantiantheories, these approaches and actions of Starbucks are very unethical. According to Individualism theory, these actions of Starbucks can be ethical because the management was doing this just for getting higher profitability. In order to enhance profits, Starbucks was making efforts to get expanded and through increased market share (Alexander, 2007). In contrast to this, according to Utilitarianism, actions of Starbucks are unethical as more is given by small coffee stores to people in towns as compared to Starbucks. Most of people who live in towns prefer buying from small coffee shops at lower prices rather than buying from Starbucks. More happiness is brought out by small coffee shops as compared to Starbucks.

Actions of Starbucks are unethical according to Kantianism theory because small businesses are disregarded in this way. Starbucks only focuses on their profits and show selfishness. Small coffee businesses are being destroyed by Starbucks and running small businesses out for gaining more market share and profitability. Starbucks was accused of treating people in a way of making profit and not giving value to people. Their techniques of expansion are not coming through any goodwill and they do not get fully motivated. Another approach of the theory of Kantianism which is unethical relative to the actions of Starbucks refers to the autonomy’s formula. According to this formula, the organisation should follow the legislation that has been set by them for themselves (MacDonald, 2007). Starbucks does not do this for the reason that their motto is to treat one another with dignity and respect. This model is not followed clearly because of the reason that they do not show any respect or dignity to customers of coffee shops, owners and community people that they are trying to put out from business.

Starbucks is identified as unethical under the virtual theory due to the fact that they opened large number of stores so that smaller business can go out at faster rate. However, there was a failure in this plan and the result was the closing of stores, due to the fact; that they were opened prematurely. Starbucks did not perform virtuously for any other reasons like paying more than the market value of different leases in order to kick out competitors. Under this theory, it is not ethical at all. Except for the individualism theory, under every other theory Starbucks is unethical, where the one and only objective is to develop profit, which is what they do exactly. Starbucks is selfishly and purposely putting coffee shops out of business in order to acquire more profit irrespective of stakeholders involving the owners and customers of coffee business that are losing their business and are at the end to get closed. Most of their actions are entirely unjust and unethical (Drew et al, 2006).

3.2. High use of sugar

Starbucks had to face high pressure from its customers, policy makers, nutritionists that there is a presence of about 25 tea spoons of sugar in products of Starbucks. This has exerted pressure on Starbucks through a British Campaign group. The analysis has shown that Starbucks was accused of adding three times more sugar than Coke and it negatively affects heart of people in accordance with American Heart Association. According toBrignall (2016) approximately 35% of hot drinks being sold at Starbucks contain high amount of sugar in it. Due to the excessive use of sugar in products, customers of Starbucks are suffering from different diseases among which diabetes is the most crucial one. This act of Starbucks is in contrast to the stakeholders’ theory. According to Stakeholder theory, it is important for an organisation to give importance to all of its stakeholders while formulating and implementing business policies. As, Starbucks’ excessive use of sugar in its products is resulting into health damage of its customers, so it means it is not considering its customers while formulating policies. This can result in to creation of negative brand image in minds of customers (Erkens et al, 2012).

3.3. Avoidance of Taxes

The Seattle-based group, with capitalisation of forty billion dollars, is 2nd biggest café chain or restaurant internationally after McDonald’s. The reporting of Accounts by UK subsidiary of Starbucks represents that since its opening in 1998 in UK, Starbucks has earned more than three billion pounds in sales of coffee, and started seven hundred and thirty five new outlets, however they only paid 8.6 million pounds in taxes, mainly because of disallowance of few deductions by taxman(Davies, 2015).

For more than 3 years, no profit has been reported by Starbucks and they have not paid income tax on 1.2 billion pounds sale in UK. In contrast to this, for the UK sales of 3.6 billion pounds, McDonald’s has paid more than eighty billion pound income tax. KFC, third largest café chain or restaurant in terms of market capitalisation has paid thirty six million pounds on UK sales of 1.1 billion pounds. Still translations of analyst and investor calls over twelve years represents officials of Starbucks frequently discussed regarding business in UK as “profitable”, said that they were quite happy with this, or even referenced it as an instance which can be followed for working back in US. Chief Financial Officer of Starbucks Troy Alstead and an official of the company cited in transcripts of calls Reuters inspected, contended comments given by him in past, saying that Starbucks is bound to follow global rules of accounting and pays the proper income tax in every country where it is running its operations. It is said by a spokesperson through an email that Starbucks pursue to be an exceptional taxpayer and to pay all level of taxes, Starbucks do not write its own tax code; it is bound to follow the income tax code which it follows well (Christians, 2013).

In accordance with Ligitimacy Theory, this act of Starbucks is in opposite to corporate governance and ethical practices, as the theory states that all acts of an organisation should be according to social norms, values and beliefs. In order to operate within a country, it is important to pay all kinds of taxes. As, Starbucks was involved in tax avoidance, so it means the company was showing unethical behavior towards the country (Rogowski, 2015).

According toHop et al (2013), the strategy of Starbucks is evidently profoundly in opposed to the countries’ interests where they are running their business and is very unfair; they are putting an effort to play gamble with taxman which is disgraceful.  There is no evident that any law has been broken by Starbucks. Undoubtedly, total tax rate of the group, comprising of deferred taxes that is not must to pay, was thirty one percent previous year, much larger as compared to 18.5 percent tax rate at an average that has been paid by large companies of US in recent times.

On overseas income, Starbucks made a payment of around 13 percent tax, which is one of the lowest one in the customer good area. The tax authorities of UK and Internal Revenue Service (IRS) of U.S. stated the confidentiality rules which prevented them from commenting.

Currently, Starbucks are much involved in large number of scandals relative to tax avoidance attracting street protests and criticism in London with participation of individuals, non-government organisation and union. In accordance with reports which have followed up particular schemes, they have allowed the organisation not to pay taxes in UK despite of the development of sales of GBP. This research is a trial for analysing the problems in descriptive way.

Graham et al (2013) conducted a research which can be termed as most significant and largest secondarydata that target over the implications and reasons of tax avoidance scandal of Starbucks. Through the research, attempts were made to define the procedure with the help of which Starbucks management was capable of communicating business profits to investors at the similar time when financial losses were reported to government agencies present in UK. In accordance with Graham et al (2013) Starbucks is capable of avoiding taxes in the UK because of two major factors. At first, Starbucks UK subsidiaries were developed in order to pay royalties to the property units which are present in the tax heaven positions for the usage of intellectual properties like business procedures and brand. The report depicts that these payments cause reduction in the taxable amount of UK.Secondly, the exercise of allocating the financial resources which are being developed in UK within the supply chain of Starbuck permits the organisation to report more of the losses in UK despite of developing more of the revenues. 

3.4. Use of toilet water in Coffee

A Starbucks café in financial district of Hong Kong that utilised water through tap present near a toilet for brewing coffee has started a torrent of many angry reactions through consumers.According to Stakeholder theory, an organisation should take care of all of its stakeholders while doing business operations. This corporate governance issue of Starbucks is in contrast with Stakeholder Theory, because according to this theory, the company did not give importance to its society. This resulted in creation of negative image of Starbucks in minds of customers (Harrison and Wicks, 2013).

For the specific store, there is no actual direct supply of water; therefore it is required to get the drinking water through nearest store present in the building. Some of the precautionary measure could have been taken.The water coming through the lavatory tap can go through the filtration system in order to ensure that it pass standards of World Health Organisation and local standards.The major problem is the risk of transmitting pathogens from the environment of restroom into the food preparation area of Starbucks(AFP, 2013). Nowadays, the current system of corporate governance and accountability in UKhas lead organisations to focus highly on corporate social responsibility and corporate governance issues. In UK, the explicit nature and concreteness of CSR has been increased due to the implementation of Frijins Code introduced in 2008. In UK, CSR is highly encouraged by government policies and companies are forced to use it in long term planning. This helps UK government to reduce these types of issues that have been faced by Starbucks (Zadek et al, 2013).

4. Starbuck’s practices for addressing key issues

From the analysis of case, it can be seen that use of corporate power in a responsible manner is important for companies nowadays. Starbucks had to face various issues regarding its corporate governance practices. Due to these issues, the scrutiny of actions taken by corporate is increased and confidence of investor is weakened (Bain and Band, 2016). Due to the presence of corporate governance issues, the company’s performance is negatively affected and the regulatory environment is also badly affected. If the management of company fails to govern and manage corporate practices in an effective and efficient way then due to this negative image of company is created in minds of investors. The way in which firms compete in market for consumers, employees and capital is affected by public sentiment. There is a need of having mind-full boards for restoring trust and confidence of investors and other stakeholders. The management of Starbucks put a lot of effort for overcoming the corporate governance issues faced (Karolyi, 2012).

4.1. Community Stores

For having positive influence over the communities it works with and in, Starbucks has developed different community stores. The non-profit stores of Starbuck provide different services targeting to fulfil the requirements of communities in which they are present. In turn Starbucks donates $0.0 to $0.15 at every transaction to the non-profit partner. Starbucks has hired almost 10,000 veterans and military in the year 2018. It targets the inclusion and diversity present in the organisation. The organisation also gives opportunities of training to youth to communities, and they have developed the foundation of Starbucks. A 501c3 targets to empower the communities (Aiello and Dickinson, 2014).

According to Lemus et al (2015), Starbucks aimed to make investment in communities and people with whom they work. When an organisation put the people at first place, and targets on making positive alterations in the community, customers actually notice. In fact, researches have depicted that when organisations provide support to environmental or social problems, 93% of customers owns more positive image about the organisation. When the organisations make investments, they observe that there are fewer turnovers in this case, and employees’ turn into the advocates of organisation.

4.2. Ethical Sourcing

Customers have become more and more affected through media. With the identification of increasing significance of sustainability (which involves the three sustainability pillars: environmental, social and economic), customers want to acknowledge that services and goods bought by them are sourced in proper manner or not. Ethical sourcing is a good business, it contains perishable products that do the incorporation of ingredients commanding average premium costs of 20%. Ethical sourcing gets increased beyond the customer goods (Barrientos, 2012). Because of the pressure of environmental concerns and customers, procurement increases beyond the ethical sourcing to recyclability being the part of the life cycle of product. The price of waste disposal, mainly with carbon content enhance beyond the inflation rate as directives of European Union are integrated within the UK. Therefore, it pays to acquire the sourcing right through the start. Product labelling has got even more common (Kim et al, 2016).

Ethical sourcing, the second pillar identifies the manner in which Starbucks purchases the items. The organisation is committed to ensure that developed goods, cocoa, tea and coffee are ethically and responsibly developed and purchased. The success is connected with the success of suppliers and farmers who produce and grow the products. Only such items are being purchased through manufacturers and farms that adhere to particular standard of treatment(Barrientos and Dolan, 2012).

4.3. Payment of Taxes

 Starbucks paid equivalent to the corporation tax in the year 2015, as it did in the UK in first 14 years.However, it still suffered from criticism for less transparency that makes it harder to identify whether it is paying right amount of tax over espressos and frappucinos.The Seattle-based coffee house posted a profit of almost £34.2m in the end of September.There was an improvement instead of dip in sales, as it reduced to £405m from £409m. The decline in revenue got offset through decreasing expenses and through selling the stores of organisation to franchisees.It also made the payment of around £8.1m in organisational tax at the rate of 24% above the tax rate of 20% of UK Corporation due to the alteration in the practices of accounting (Sari and Hunar, 2015).

 The tax contribution made in the year 2015 was less as compared to the £8.6m which was paid within the 14 years after the UK debut in year 1998, despite of £3bn sales in that time period.Starbucks transformed into the poster child for the tax avoidance of corporate in year 2012 after emergence of merge tax contribution. It was accused to use artificial structures for shifting profits into lower jurisdictions of tax in UK. The furore made a deal with HMRC to waive the deductions of tax and to pay £ 20m in corporation tax, involving £11.2m.Starbucks has also shut down the Alki which is the organisation of UK and it was the part of labyrinthine network which was basically designed to cut taxes at European office (Ayuba et al, 2015).

5. Conclusion

It can be summarised in the end that management of Starbucks has focused considerably on corporate governance. According to the management of Starbucks, governance is not only linked with the availability of accountability and stewardship systems, it is related to assurance that they are running well. While it is possible for the institution which is poorly governed to prosper and survive. The link in between financial failure and poor governance is high. To operate a financial institution with unsuitable governance and control is similar to sailing of boat without navigating tool; there is an opportunity that it can approach port, but the probability is not much high.

The directors’ board often plays the major part in the corporate governance. They are responsible to endorse the strategy of organisation, to develop policy, to remunerate, supervise and appoint senior executives, and to ensure the accountability of company to its authorities and owners. Starbucks faced some considerable corporate governance issues in past, but through effective management of ethical and corporate governance practices, the firm has become capable of rebuilding its image in the society. This case study helped in understanding the importance of corporate governance and ethics. The case study has shown that although Starbucks is a famous brand, but due to mismanagement and less focus on corporate governance, the company faced serious issues. So, in order to survive in business world successfully and with high profitability, companies have to make sure that they follow ethical practices. According to the analysis, it can be seen that although in past Starbucks faced some serious issues but through implementation of effective strategies and mitigation policies, the firm has regained its position in market. On the basis of financial performance of the company and its ability of overcoming corporate governance issues, an individual can invest in Starbucks.

6. Recommendations

  • Furthermore it is suggested that Starbuck should always focus of ethical practices and for improving its brand image, the management should disclose all information related to ethical practices. The investors who are about to invest in the company should have the proper knowledge of the information which is disclosed. Many of the information provided by the organisation reforms are already known (Chen et al, 2012). For instance, by having the complete knowledge of the proxy statement, the stakeholders who are willing to invest can decide as to invest in the company or not and also they have the complete knowledge about the financial expertise of the members of the committee.
  • During the past decade, the extraordinary performance of UK economy misguided many investors about investing in the country. This proved to be a very strong signal to the management that is market is open. Also the investors paid attention to the information which was already leaked out. So in company reports, the practices and actions of companies towards corporate governance and corporate social responsibility must be completed reflected (Jo and Harjoto, 2012).
  • According to Sapra et al (2014) the main safeguarding factor against the instability of financial system is the provision of Sound leadership which was used by Starbucks to take care of the problems faced by them. Sound leadership consists of experienced top management and competent directors, clear accountability of the staff, good governance and rational and accurate business plans. Basically the board of directors is responsible to take care of the main strategy which is used by the organisation and the decisions taken by the top management to support the acts to perform those strategies. This means that those persons who have the required skills and qualities are to be presented to the management. Furthermore, the board should provide proper independence to its directors who have to take care of the management stuff. The basic responsibility of the top management is to describe the business goals, to look after the daily decisions taken and to make sure that those decisions prop up the main goals and policies which are set by the board members. To make sure the financial stability, the overall goals of the company should be supported by the thorough internal control and proper risk management. The board of directors should be responsible in paying complete taxes and fulfilling all norms and values of society (Susanty and Kenny, 2015).  Execution of the overall objectives of the firm must be supported by rigorous internal controls and effective risk management. Successful internal control equipment is required to make sure that the information provided by the company is accurate and error free and the loopholes are taken care of immediately. The same mechanism is required to encourage the operational effectiveness of the firm (Wintoki et al, 2012).
  • According to Khan et al (2013) boards need to work with management in order to ensure such corporate culture in which motivation of employees is done for reporting ethical concerns and compliance with the help of internal channels of organisation. Boards need to assess the quality of message of organisation and they should communicate it at every possible opportunity that internal reporting is critical, valued and expected for the success of organisation. Motivation of employees for coming forward with concern can be more challenging as the employees are eligible for such awards with the help of whistle blower program of SEC to give original information on violating federal laws related to security. This involves, for instance, the violations of the Foreign Corrupt Practices Act, which attracted important fines and bounties. The major challenge is to develop such culture that motivates internal reporting for facilitating the effectiveness of system, without de-motivation of employees from reporting to SEC. Boards need to continue the monitoring process and they should assess the effectiveness of systems closely in year 2012.
  • Starbucks should target mainly over the corporate social responsibility. Social responsibility is most significant for the business, as it depicts to both media and the customers that the organisation is interested in broader social problems that does not directly affect the profit margins. These problems can be global, national or local, but relative to wellness and health of others. Due to this fact; evidence of healthy social responsibility can influence the decisions related to purchase where consumers look for making more of the ethical purchases. Therefore, in turn, it can result into more profits for business. However, developing a trustworthy and highly regarded reputation owns more value. Observers admire that social responsibility initiatives require more of the time for management and establishment (Clapp and Rowlands, 2014).

 

 

 

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